Mary Holm: Loan law hits wrong note for musician

Having a music degree and a student loan can make life difficult in dealing with repayments ... but often it's no better for young people with more mainstream qualifications

Making a living from music is difficult in New Zealand, so a student loan can become a heavy burden. Photo / Thinkstock

Q: Regarding student loans, while I can accept the principle that students overseas pay interest, our son has got completely caught out with this.

He has a music degree from Massey University and a student loan. It is very difficult to make a living from music in New Zealand and after five years of doing itinerant music teaching in schools, various music performances in New Zealand (earning very little) and private pupils, he returned in January from six months overseas as a musician on a cruise ship (away about 10 days longer than the interest-free period - he has no control over the length of a contract).

He is now on another two-month contract and later this year will do a further six-month contract.

He is now regarded as being "overseas" for the purposes of his student loan, and until he can settle in this country for longer than six months he continues to pay interest.

However, Inland Revenue says he is a New Zealand citizen for tax purposes - he is self-employed. I feel this is very harsh and that when one has New Zealand as home and this is where they pay their tax, including ACC levies, they should not have interest added to their loan.

We always made sure our three children were aware of what a student loan meant and that they should pay it off before entertaining the idea of going overseas. However, in this situation it just was not possible to earn a reasonable income let alone pay off the loan.

The student loan issue is a touchy subject in this household at the moment.

A: I can see why. It does seem tough that your son is a New Zealander when it comes to paying tax, but not when it comes to student loan interest. Perhaps he should take it up with his MP.

Beyond that, a hard-hearted person (not me, of course) might say to your son, "What do you expect if you do a degree in music?" However, the next letter suggests those with more practical degrees face similar problems.

Lower the bar

Q: I am a very concerned single parent, renter of 10 years, mother of two sons who went to Otago University. One has a $32,000 debt. The other has a $22,000 debt.

Neither of them can get work in New Zealand in finance and economics. They are both in Australia, trying to make ends meet, flatting like students (six per house).

The finance degree son is painting. The economics son is doing any work that's available. Neither of them is in any position to pay down their loans. Nor am I at 60 able to get work either.

I phoned IRD last week re their loans. If I were to pay $5000 a year off their loans, would interest apply? They replied, "Yes, out of the $5000 per annum, $3000 would go in interest." So there is no way I am able to help them either.

Unless the Government realises it, student debts will just increase, as many people are in the same position because pay rates in this country are very low. Australia at least offers better hourly rates, but with a higher cost of living.

If the Government were to not charge interest on these loans, most people and their struggling parents would at least be able to chip away at helping them repay them. Unless the IRD lowers the bar, they will forever be indebted.

Not everyone has wealthy parents to bail them from this burden. And I'm sure it affects the health of the parent trying to make ends meet themselves.

A: You put the case well.

I could get pedantic and say that paying $5000 a year, even if much of it goes in interest, certainly does help stop the loans escalating. But your main point, I think, is that realistically you and your sons can't foresee getting rid of the loans for a long time - and it makes you feel like giving up.

Maybe the Government should give a break - perhaps charge much lower interest - to overseas students who set up even small regular repayments, to give them an end in sight.

Graduate first

This is in reply to the contributor last week who was baffled by parents who pay off part of the children's student loans, as opposed to funding the students while they study, so they don't need a loan.

We have made a one-off payment to our daughter's student loan rather than covering her expenses during her university years. This is because we decided not to contribute until she had completed her degree and "earned" our financial support.

We also have a son who is a few papers away from his degree, and we were really tempted to make a one-off payment on his loan before March 31. But we stuck to our original position and will only be making a payment once he has graduated.

A: Fair enough. Incentives can be powerful.

Trusting the boss

Q: Call me misled, trusting, or naive. I prefer "trusting".

I have been reading the latest IRD Employers Tax Information Sheet. It states that the KiwiSaver minimum employer contribution will increase from 2 to 3 per cent of gross salary after April 1.

That I knew, but on checking my latest payslip I find my employer has been making its KiwiSaver contribution as a net payment.

I need to check my facts carefully before I talk to my employer, as I believe this will not be a unique case in my workplace, and therefore I ask for your expert advice. I attach my recent payslip for your opinion please.

A: Would it be okay if I call you confused instead of those other labels?

Three changes to KiwiSaver are relevant here:

• Since April 1 last year, employer contributions have been taxed. So while employers do contribute at least 2 per cent of gross pay, not all that money goes into the employee's KiwiSaver account. The rest is paid as tax. The tax rate starts at 10.5 per cent for those on low incomes, rising to 17.5 per cent, 30 per cent, and finally 33 per cent for those on high incomes.

• Your pay slip shows an employer contribution of less than 2 per cent of your gross pay because some of the money has gone to Inland Revenue.

• From April 1 this year - on Monday - minimum employer contributions rise from 2 to 3 per cent of people's gross pay. Again, those contributions will be taxed, so you will see less than 3 per cent going into your KiwiSaver account.

• Also from Monday, the minimum you as an employee can contribute - unless you are on a contributions holiday - also rises from 2 to 3 per cent. This money is not taxed, so the full amount will go into your KiwiSaver account.

Your payslip looks fine to me. You can continue to trust your employer.

Dividing the property

Q: Following on from your excellent article on relationship property I wonder about pre-nuptial agreements and the effect they have on a spouse's ability to claim 50:50 of a property on separation.

Surely if your adult child set up such a contract that would supersede the Relationship Property Act and be less devious than setting up trusts when being given inheritances?

A: Section 21 agreements include all agreements made before or during a marriage or de facto relationship "and indeed after relationships have ended", says Deborah Hollings Chambers, QC. "They are the same thing in terms of the ability to contract out of the 50:50 regime of a property at separation. That section (well okay, technically also sections 21A to 21T) deals with all agreements as to property."

Note, though, the recent Q&A about the fact that each partner must have their own lawyer, and each lawyer must certify that they have explained the effects and implications of the agreement.

Adds Hollings Chambers, "In general, it requires full and frank disclosure of assets and values of assets.

"I also agree that agreements are desirable because they provide transparency and honesty. They prevent conscious or unconscious exploitation because everyone knows where they stand in regard to the effect of contributions.

"Having said that, because of the interplay of the law of trusts and relationship property (which is basically still a mess), in my view the best 'belts and braces' structure for protecting inheritances is both a trust and a Section 21 agreement."

Still, a Section 21 agreement on its own "is also effective and is certainly less devious than the circumstances of a partner who, for example, fails to disclose the existence of a trust or its effect on separation to their spouse."

Makes you wonder about the sincerity of some relationships, doesn't it?

Protecting grandkids You recently gave some information about Section 21 agreements and relationship property.

Can we, as parents of a child who will one day inherit from us, have a Section 21 agreement drawn up to protect this child and our grandchild, or is it something that would need to be done by our daughter after we have died?

This would obviously be a touchy subject to bring up with one's children. But as parents one seeks to protect one's family and family assets against the unknown.

We have a trust, and hope this would offer some protection, but even this would not appear to be foolproof if assets became intermingled.

It's your daughter, not you, who makes the Section 21 agreement with her partner, which can be done at any time, regardless of whether you are alive.

Still, you could instruct your lawyer to draft an agreement "and provide it to the child and encourage them to see a lawyer and speak to their partner about reaching an agreement", says Hollings Chambers.

"That is the discussion in which parents say to their children, 'I want you to do a Section 21 agreement with your partner so that any money we left you is protected for the grandchildren'. This is not that uncommon. I have seen it numerous times in my own practice.It can be a bit awkward but most of the time people fully understand the reasons for it, as does the child's spouse.

"Most people recognise that inherited property is fairly treated as not available for division between spouses unless specifically applied for the benefit of that marriage or de facto partnership," says Hollings Chambers.

Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.